2 Losers and 1 Winner in Today's "Promotional Environment"

The shopping season has forced retailers to discount more than usual, and this has directly affected their stock prices.

Black Friday and Cyber Monday kicked off one of the most intense promotional environments retailers have ever seen. In the past, massive discounts were only available on these two days, but now the discounts have been extended and they seem to be constant throughout December. This has caused retailers to lower their earnings guidance due to lower margins, and the stocks have taken a hit. Let's look at two of the biggest retail losers and one brand that has flourished without discounting at all.

Loser: Express

Source: Express.com.

Express(NYSE:EXPR) is a speciality retailer of women's and men's apparel and accessories, with a targeted age range of shoppers who are 20 to 30 years old. On Dec. 4, Express reported third-quarter earnings that were in line with expectations, but proceeded to fall 22.98% after it cut its outlook for the fourth quarter. Here are the new expectations:

Metric

Q4 Expectations

Q4 2012

Same-store sales

Low-single digit growth

1.5%

Net income

$56 million-$60 million

$63.9 million

Earnings per share

$0.66-$0.71

$0.75

Shares outstanding

84.8 million

85.3 million

The company cited the promotional environment as the main reason behind the guidance reduction. CEO Michael Weiss said that the main factors in driving customer traffic at Express this season have been pricing and "offering the same terrific discounts on things that other people are, that our competitors are," while also having the most fashionable products available. Being forced to offer the best products at the lowest prices just to compete for the consumer is not a great situation for Express. Its stock now trades more than 24.5% below its 52-week high, and a weak fourth quarter could send it even lower. I would stay away from Express for now.

Loser: American Eagle

Source: AE.com.

American Eagle(NYSE:AEO) is a specialty retailer of apparel, accessories, and personal care products, and it is one of the destination retailers for teens. On Dec. 6, the company reported earnings in line with expectations and revenue that exceeded expectations; however, like Express, American Eagle announced weaker-than-expected guidance for the fourth quarter. Here is the new outlook:

Metric

Q4 Expectations

Q4 2012

Same-store sales

Low single-digit decline

4%

Earnings per share

$0.26-$0.30

$0.55

Analysts had expected earnings of $0.39 per share for the fourth quarter, so the company's guidance came in well below their estimates. In its conference call, CEO Robert Hanson said, "We continue to operate in the most challenging sector of retail, where there has been intense promotional competition and tepid consumer spending. This has led to weak store traffic and a high level of promotional activity." This is not a good sign at all, and the stock has fallen more than 9.5% since then. I would stay far away from American Eagle because of the "tepid" consumer and because teen retail is one of the most difficult industries to be successful in.

Winner: Michael Kors As retailers scramble to offer the lowest possible prices to drive traffic, Michael Kors(NYSE:KORS) hasn't had to do much of anything to keep product moving. The only notable "promotion" the company has offered recently is free shipping on orders over $100 if you order from its website, as you can see here:

In stores such as Macy's and Dillard's, Kors brand items like watches and handbags are currently offered for 25% off, but this comes at the expense of Macy's and Dillard's, not Michael Kors; this fact has been confirmed by the salespeople at the retailers' locations at the Altamonte Mall in Altamonte Springs, Fla., and by the friendly people at each corporate headquarters. I think the best-in-class management team at Michael Kors knows the strength of their brand and realizes that discounts are not needed to drive sales. This is one of the best companies in the market today.

The Foolish bottom lineToday's promotional environment is killing the bottom lines and the stocks of retailers like Express and American Eagle. To navigate this environment from an investment standpoint, it is better to buy the hot brands rather than the retailers who sell them. Michael Kors has been one of the hottest companies in the market over the last two years and it has been continuing its dominance this shopping season. Investors should consider buying Michael Kors on any significant pullback, as it has shown that declines are nothing more than buying opportunities.